Quick quiz: If you improve the productivity of energy use at a steel plant in China, will that plant save energy, or produce and sell more of its now-cheaper steel? If ultra-efficient lightbulbs spread across rural India, will we see energy consumption there decline or rise?
With about two-thirds of global energy consumed in the refinement and transport of energy and the production of goods and services and over 90 percent of growth in energy demand spurred by the so-called "Rise of the Rest" in the emerging economies, these two examples should be at the front of our minds as debate spreads across the blogosphere about rebound effects -- the economic dynamics by which energy efficiency improvements lead to a rebound in demand for now-more-efficient energy services (see an FAQ on rebound here).
Author and reporter David Owen's new book, The Conundrum has sparked this latest round of rebound debate (see e.g. Bryan Walsh, Matt Yglesias, and David Roberts). Much of this debate has (understandably) centered around some of the most readily understandable examples of rebound drawn from our personal experiences -- efficient cars, appliances, home electronics, etc.
Unfortunately, these examples of personal energy use in wealthy countries are also precisely the cases where rebound effects are the smallest, leading some observers of this debate to conclude rebound is a smaller deal that it truly is.
Witness the focus on the so-called "Prius Fallacy" which Time's Bryan Walsh describes as this:
[A]s we become more efficient at using energy, we can save money -- which then allows us to use more of that energy than we did before. Picture it this way: you trade in your gas-guzzling SUV for a new efficient hybrid, end up paying less per mile for gasoline, and use some of the savings to drive more than you did with the SUV. The efficiency has rebounded.
Its a good clear explanation of how rebound effects work, but unfortunately, it focuses on one of the sectors where rebound effects are smallest: consumer demand for end-use energy services in rich countries.
Several readers at The Dish quickly pushed back on this "Prius Fallacy," most drawing on their own personal experiences.
Its easy for each of us to understand why any rebound in driving after the purchase of a more efficient car will probably be fairly small: most of us in the rich nations already drive as much as we need to, or close to it. In economics-speak, our demand for driving is "saturated," and thus is pretty "inelastic" or non-responsive to changes in the marginal price of driving.
Studies of direct rebound in vehicle miles driven after improvements in fuel economy for personal vehicles generally show rebounds eroding only about 10-20 percent of the initially expected energy savings. Additional indirect and macroeconomic effects may mean total rebound erodes roughly one quarter to one third of expected energy savings from more efficient vehicles. That's still a pretty decent net gain in terms of reduced energy demand, which is why improvements in personal vehicle fuel economy in rich nations like the United States still make a lot of sense from an energy conservation perspective, even as we should revise our estimate of the net impacts of more efficient vehicles in light of this not-insignificant rebound.
Unfortunately, all this focus on examples from our personal lives here in the United States -- refrigerators, air conditioners, electronics, driving -- misses the real heart of the rebound debate. Only about one-third of all energy use is consumed in these end-use activities, while the rest of the energy we use is hidden, embedded in the goods and services we consume.
Two-thirds of total energy is consumed in the "productive" sectors of the economy -- agriculture, industry, and commercial sectors -- to refine and transmit energy and make and transport the goods we consume. And while more study of rebound effects for efficiency improvements at producing firms (e.g. industry and commerce) is needed, the literature to date indicates that direct rebound effects may be on the order of 20-70% for these sectors, with additional rebound due to indirect and macroeconomic effects.
In short, rebounds associated with the energy used hidden in the productive sectors of the economy can be much greater than rebound in the end-use consumer energy services we are most familiar with in our daily lives.
Furthermore, when it comes to global energy demand trends, the rich countries we call home are just a small part of the story. The International Energy Agency, for example, projects that virtually all of the growth in energy demand over the coming decades will come from outside of the OECD (or "developed") nations, with China and India chief among the increasingly energy hungry emerging economies.
As rebound effect expert and Breakthrough Institute Senior Fellow Harry Saunders and I explain in the magazine of the UN Industrial Organization:
In contrast to conditions in wealthy nations, demand for energy services is far from saturated throughout the developing world. After all, roughly one-third of the global population still lacks sufficient access to even basic modern energy services.
In the world's emerging economies, the cost and availability of energy services is often a key constraint on their enjoyment. Demand is thus far more elastic (responsive to changes in price), and rebound effects much larger than in the developed economies. That in turn means rebound effects are much larger.
Very few studies have carefully examined rebound dynamics in developing economies, but those that have find direct rebound effects alone to be on the order of 40-80% for end-use consumer energy services, such as lighting and cooking fuel - more than twice as large as the equivalent rebounds found in wealthier nations.
As a wide body of development literature recognizes, expanding access to modern energy services is also a principal driver of development outcomes. Whether such services are provided by burning more fuels, burning them more efficiently, or both (the most likely scenario), the outcome is the same: greater economic activity and expanding welfare, which in turn demands more energy.
As we thus cautioned:
Energy analysts [and everyone else!] must therefore be very careful in generalizing experiences or intuitions about rebound effects in rich, developed nations to the larger bulk of the global population living in developing economies. The shadow of Jevons' Paradox still looms large over much of the developing world.
In other words, beware of the fallacy of the "Prius Fallacy." Rebound is a much bigger deal...
Read the full essay by Dr. Saunders and I in Making It, the UNIDO magazine here.
Read an introductory FAQ to rebound effects here.
You can also read our comprehensive review of the expert literature and research into rebound effects here.